I. International Agreements

A. Introduction

Canada is a party to a number of bilateral and multilateral international agreements that establish rules for the procurement of certain supplies and services by national governments that are designed to give foreign parties expanded, but still restricted access to each other’s markets. The two most important of these agreements for Canada, the provisions of which are included in implementing Canadian legislation enacted by Parliament, are the plurilateral WTO Agreement on Government Procurement (AGP)[1] and the trilateral North American Free Trade Agreement (NAFTA).[2]

B. The WTO

The WTO has published the Appendices and Annexes to the Agreement on Government Procurement (which it refers to as “the GPA” instead of “the AGP”) submitted by each party.[3] For Canada, Annex I lists eighty-one Federal Government entities, including most governmental departments and agencies, that are generally bound by the AGP and a special list of goods that are covered if they are purchased by the extensively exempted Department of Defence and the Royal Canadian Mounted Police. Annex II offers to extend the AGP to Canada’s provincial entities subject to certain exceptions as, for example, restrictions designed to promote environmental quality if a plurilateral agreement on subcentral agencies is reached, but no such agreement has been concluded and no provinces have been added to this list. This is in sharp contrast to the United States, which has already included thirty-seven states in its Annex II despite the lack of a plurilateral WTO agreement on government procurement by subcentral agencies.[4] Annex III adds nine Government Enterprises to the AGP, including the Canada Post Corporation and four museums that Canada has offered to include in the AGP. However, like Annex II, Annex III does not currently bind Canada because the parties to the AGP have not reached an agreement to include enterprises, such as Crown-owned corporations, that are not considered to be “entities.”[5] Similarly, Annex IV offers to make certain non-construction services subject to the AGP, including legal services, accounting and software implementation, and Annex V offers to add most construction services to the AGP.[6]

Canada has also submitted General Notes, which basically summarize some of the Canadian understandings or interpretations of the limitations and exclusions contained in the AGP and confirm or add to the derogations Canada has included in its Appendices and Annexes to the AGP. These General Notes state that the Agreement does not cover shipbuilding, urban rail, certain types of electronic equipment, set-asides for small and minority businesses, agricultural support programs, and national security exemptions respecting oil and nuclear technology. They also note that the AGP does not cover “any type of government assistance, including but not limited to, cooperative agreements, grants, loans, equity infusions, guarantees, fiscal incentives, and government provision of goods and services, given to individuals, firms, private institutions, and subcentral governments.”[7] As will be seen, this provision is one that has been cited by U.S. authorities in defense of the legality of the “buy American” provisions contained in the economic stimulus package, which have been widely criticized in Canada. The General Notes also state that the services Canada has included extend only to parties that grant reciprocal access[8] and that for the European Union, the AGP does not apply to activities in the field of drinking water, energy, transport, or telecommunications due to restrictive EU policies in these areas.[9]

C. NAFTA

Since 1999, the percentage of merchandise exports from Canada destined for the United States has actually declined from almost 90% to approximately 75% of all Canadian exports.[10] Nevertheless, in 2008 bilateral trade between the two countries was approximately $660 billion,[11] reportedly making it the largest bilateral trading relationship in the world.[12] Thus, the United States remains by far the largest export market for Canada and a market that is vitally important to the Canadian economy. Canada is also the United States’ largest trading partner. In fact, its purchases of U.S. goods and services are more than twice that of the U.S.’ second and third largest trading partners despite the fact that it has less than thirty-five million inhabitants.[13] One reason for this is that Canada and the United States both import large quantities of manufactured or partially completed parts from each other, which are then included in finished products. This is particularly true in the automotive sector, which has been fully integrated since the 1960s.

Since 1994, the primary instrument regulating U.S.-Canada trade has been NAFTA. Between 1989 and 1994, trade between Canada and the United States was regulated by the Canada-U.S. Free Trade Agreement. This initial agreement was replaced by NAFTA when Mexico became a party. Since the original bilateral U.S.-Canada agreement went into effect, trade between Canada and the United States has reportedly tripled in dollar amounts.[14]

Chapter 10 of NAFTA addresses government procurement. It was originally intended to expand upon the provisions of the extant Canada-U.S. Free Trade Agreement and the extant General Agreement on Trade and Tariffs Agreement on Government Procurement, and Chapter 10 still has a wider application than the AGP. However, there are many similarities between the AGP and Chapter 10. Both have thresholds. For the AGP, there is a table of thresholds published by the WTO.[15] The basic table sets out the thresholds in terms of Special Drawing Rights, but they are also converted to national currencies.[16] In the case of NAFTA, the threshold for contracts of goods and services for government entities was set at $50,000 for contracts for goods or services and $6.5 million for construction projects; for government enterprises, the thresholds were set at $250,000 for contracts for goods and services and $8 million for construction services.[17] However, these original figures have been indexed for inflation and are reduced to $25,000 for procurement of goods by federal departments and agencies in the United States and Canada for U.S. and Canadian suppliers. This benefit does not extend to Mexican suppliers.[18] For Mexican suppliers, the threshold is reportedly about $56,000.[19] Nevertheless, even this figure is lower than the comparable one contained in the AGP. In fact, a comparison of the thresholds in the AGP and NAFTA shows that the latter are consistently lower. This means that U.S. suppliers generally have greater access to the Canadian market as a result of the government procurement provisions of NAFTA than they do as a result of the government procurement provisions of the AGP.

Because there is a higher threshold for the benefits of the government procurement provisions by enterprises than entities, it is sometimes important to know whether a contact has been offered by an enterprise or an entity. This issue was considered by the Canadian International Trade Tribunal (C.I.T.T.) in the case of Canada (Attorney General) v. Symtron Systems Inc. In that case, Canada’s Department of National Defence, which is an entity, offered a contract for a covered service through Defence Construction Canada, which is an enterprise. The tribunal found that the lower entity threshold should apply, as the Department of Defence would own the facilities to be built under the contract and the use of an enterprise to accept tenders could be seen as a maneuver to circumvent NAFTA’s requirements.[20] This decision was affirmed by the Federal Court of Canada.[21]

Article 1003 of NAFTA provides that the parties must give the other parties’ goods and suppliers treatment that is “no less favourable than the most favourable treatment that a Party accords its own good and suppliers or the goods and suppliers of another Party.”[22] This is the principle of national treatment and nondiscrimination.

As to the rules of origin, Article 1004 of NAFTA states as follows:

No Party may apply rules of origin to goods imported from another Party for purposes of government procurement covered by this Chapter that are different from or inconsistent with the rules of origin the Party applies in the normal course of trade, which may be the Marking Rules established under Annex 311 if they become the rules of origin applied by that Party in the normal course of its trade.[23]

Thus, NAFTA recognizes that the rules of origin may differ from country to country, but prohibits the adoption of rules of origin for government procurement that require a higher percentage of content in goods or services originating in one of the parties than they do for other purposes of the law, including for the purpose of imposing customs duties or tariffs. Article 1005 goes on to add that benefits can be denied to an enterprise that is owned or controlled by persons of a non-party or an enterprise that has no substantial business activities in the territory of the U.S., Canada, or Mexico.[24] Entities are not covered by this provision because most of them are government departments or agencies.

NAFTA allows the parties to deny the benefits of the government procurement provisions in a number of other situations. NAFTA partners can deny benefits to suppliers that are subject to economic sanctions or with which they do not have diplomatic relations.[25] NAFTA parties can also make exceptions to the rules on nondiscriminatory treatment for strategic and national security reasons as well as to protect health, safety, morals, the environment, or intellectual property. NAFTA also gives the parties the right to favor domestic suppliers to benefit small and minority-owned businesses and for research and development activities, as well as to support farm support and food programs.

Article 1024 of NAFTA provided that talks on further liberalization of trade under the agreement were to commence by the end of 1998.[27] Many experts expected that one subject that would subsequently be addressed was state, provincial, and municipal procurement, since no agreement could be reached in this area in the original round of negotiations.[28] However, this has not yet occurred and, consequently, NAFTA does not bind Canada’s provinces or the U.S.’ states. Why a supplemental agreement has not been concluded is not entirely clear, but it appears from the parallel experience with the AGP that the provinces and not the federal government of Canada have been resistant to the extension of NAFTA to subcentral entities. Why the provinces have traditionally been more resistant to an expansion of NAFTA was addressed by Patrick Grady and Kathleen MacMillan as follows:

Motivated in part by worries about opening up procurement in the health and education sector to foreign suppliers, the Canadian provinces refuse to go along with any deals negotiated by the Canadian Federal Government that allow the Americans to retain Buy American and small business carve-outs. But this may just be an excuse to say no.

It is particularly ironic that Canada, which has a preferential trading relationship with the United States under the NAFTA, has less favorable access to state and local government procurement in the United States than other countries such as the European Union and Japan, which have no such special trading arrangement. Canadian suppliers have their provincial governments to thank for this.[29]

However, these authors also pointed out that provincial leaders had “legitimate” concerns that even their subscription to the NAFTA and WTO government procurement codes would not necessarily exempt their suppliers from all “Buy American” provisions and that an agreement that did not accomplish this may not have been in their best interest. Nevertheless, as will be seen the next section, this situation may be about to change.

II. Buy American Legislation

The economic stimulus package included in the American Recovery and Reinvestment Act (ARRA) generally requires that iron, steel, and manufactured goods used in the construction of public works projects funded by the Act are to be made in the United States.[30] On April 3, 2009, the Office of Management and Budget (OMB) issued guidelines on implementing the Buy American provisions of the ARRA.[31] Ian Fergusson of the Congressional Research Service has summarized the provisions of the guidelines that directly affect Canada as follows:

Likely because Canadian provinces and territories have not undertaken any obligations under the AGP, OMB excluded Canada from the list of countries to which U.S. states participating in the AGP have international obligations. This means that for state and local projects funded by federal money from the stimulus bill, there is no obligation to treat Canadian firms in a manner consistent with U.S. obligations under the AGP. Thus, Canadian firms would be ineligible to bid on contracts for iron, steel, and manufactured products procured for public works projects undertaken by state and local governments using federal stimulus money. However, U.S. obligations under the AGP do extend to Canadian firms bidding on federal procurement funded by the ARRA, and Canadian firms would be able to bid for those contracts. Nonetheless, there have been several anecdotal reports in the Canadian press that U.S. contractors and suppliers are increasingly choosing to source domestically in order not to be hassled with complying with Buy American provisions in certain procurements.[32]

The inclusion of the Buy American provisions in the ARRA program has raised great concern at the highest levels in Canada about what is widely seen as rising protectionism in the U.S. This concern was perhaps best demonstrated when, in September of 2009, the Prime Minister traveled to Washington, D.C. to meet with the President and Congressional leaders, to discuss proposals that would result in a waiver for Canadian suppliers.[33] Visits to Capitol Hill by prime ministers are not unprecedented, but they are unusual and Prime Minister Harper’s visit emphasized the importance of the issue to Canada.[34]

Although the U.S. has responded that “the language of the [ARRA] and subsequent implementing regulations were written to be consistent with U.S. obligations under the WTO Agreement on Government Procurement and U.S. free trade agreements including NAFTA,”[35] and that they were not a new form of protectionism,[36] it has appointed a negotiator to explore various alternatives to largely excluding Canadian suppliers from ARRA funds.

Critics of the Canadian complaints have largely blamed the current problem on Canada’s provinces for not agreeing to bind themselves to the AGP and NAFTA.[37] Christopher Sands, a leading expert on Canada-U.S. trade relations, has reportedly suggested that “Canadian officials ‘have done themselves a great deal of damage’ with the Obama administration for the way they’ve handled the Buy American dispute,”[38] and that Canadian officials now realize that they made a mistake in not adding the provinces to the AGP or NAFTA.[39] However, as mentioned above, in fairness to the provinces, it is not clear that their inclusion in the AGP or NAFTA would have guaranteed Canadian suppliers more ARRA-funded contracts, because of the provisions of the AGP and NAFTA that allow set-asides for federal grants.

In June 2010, Prime Minister Harper asked Canada’s provinces to modify their procurement laws to allow U.S. suppliers of goods and services the benefits of the government procurement provisions of NAFTA.[40] The extent to which provincial procurement markets are closed to U.S. firms is not clear because many provincial and municipal restrictions are in the form of policies or are inserted into individual tenders rather than into written laws. Also, in June 2010, the Federation of Canadian Municipalities voted 189 to 175 to bar bids from companies whose countries impose trade restrictions against Canada.[41] This was a nonbinding resolution, but indicates that many Canadian municipalities believed that Canadian firms should have been allowed to bid on goods and services funded by the ARRP even though Canada’s provinces are not listed in the AGP and NAFTA does not cover subcentral entities or grants to subcentral entities by national governments. The actions of the Federation of Canadian Municipalities received widespread media coverage in Canada, but was seen by the federal government of Canada as being more of an expression of disapproval than an effort that would ultimately have a significant impact upon U.S. suppliers.[42]

The only provincial leader to immediately respond positively to the Prime Minister’s request for support of a bilateral agreement on government procurement was the Premier of Quebec.[43] Quebec’s support for the Conservative federal leader was not unexpected because even though it has a Liberal government, Quebec has traditionally been the strongest supporter of NAFTA, in part because it has a relatively large manufacturing base. The group that generally opposed the Prime Minister’s request most vocally was organized labor. For example, in August 2009, the president of the Canadian autoworkers called on the other premiers to reject federal proposals that would eliminate or restrict the provinces’ right to establish purchasing policies intended to benefit the Canadian economy.[44] The diverse labor groups he represented issued a statement, which read as follows:

Rather than attacking these successful and popular “Buy American” policies, Canadian governments should increase and speed up funding for public infrastructure projects and attach “Buy Canadian” conditions to the funding.[45]

We oppose expanding NAFTA to cover all sub-national procurement and the related effort to negotiate a “free trade” deal with the European Union that would also bind sub-national governments to NAFTA-like restrictions. This approach would drain needed stimulus from the Canadian economy, worsen the current crisis in manufacturing and interfere with provincial governments’ authority to provide and regulate local services.

This statement was signed by the Canadian Auto Workers, the Canadian Labour Congress, the Canadian Union of Public Employees, the United Steel Workers, six provincial and territorial Federations of Labour, and five other labor organizations.[46] One issue the statement does not discuss is the extent to which organized labor believes that Canadian manufacturers are currently benefiting from provincial and municipal “buy Canadian” policies or programs.

On December 4, 2009, the Canadian Press reported that “a deal on the Buy American trade dispute is still a long way off … but progress is being made on new rules regarding the implementation of the protectionist provisions that could ultimately benefit Canada.”[47] However, on January 28, 2010, the National Post ran a story entitled “End Near for ‘Buy American.’”[48] This article stated as follows:

Sources within the Obama administration say that an agreement to fix Buy American is close to being concluded and could be announced within days. The President is said to be resolved that future economic growth can only be achieved by boosting exports and keeping markets open, rather than by raising tariff walls.

Because Mr. Obama cannot rely on Congress to pass legislation exempting Canada from Buy American provisions, the complicated deal will rely on the President using his executive power to treat sectors of the Canadian economy as American, by claiming supply chains are so integrated they cannot be separated.

When confirmed, the agreement will be a major relief for Canadian companies doing business in the United States, not to mention for U.S.-based companies who export north of the border. The U.S. Recovery and Reinvestment Act included sections that all iron, steel and manufactured goods used in projects paid for by stimulus funding must be sourced in the United States.[49]

The information contained in this article was not immediately confirmed by government officials or reported by other news organizations. However, on February 5, 2010, a number of news organizations reported that a deal on the Buy American provisions is to be announced soon. According to Paul Viera of the National Post, in return for opening their markets, the Canadian suppliers will have access to the government procurement market and will be able to bid on programs and projects funded by the ARRA in the thirty-seven states covered by the AGP. However, the provinces will reportedly retain restrictions on foreign bids in the fields of health care, education, and correctional facilities. While the deal is reportedly limited to programs and projects funded by the ARRA, negotiations on a broader agreement are continuing.[50]

Access to the provincial government procurement market could be highly significant to U.S. suppliers. That market has been estimated as being worth approximately US$18 million, including the excluded sectors.[51]

III. Canadian Implementing Legislation

Canada does not have a federal “Buy Canadian Act.” The limitations on the national treatment provisions allowed for in the AGP and NAFTA are incorporated into Canadian law through the acts implementing those agreements.[52]

IV. Federal Procurement

The Government of Canada reportedly spends about Can$20 billion or approximately US$18.7 billion a year on Goods and Services.[53] Most goods and services are purchased by Public Works and Government Services Canada (PWGSC). Government departments spend up to Can$5000 on goods and can purchase services directly. For contracts for over Can$5000, they must go through PWGSC.[54]

Provincial governments reportedly spend an almost identical Can$18 billion amount on goods and services. While access to this market has not been guaranteed by the AGP or NAFTA, this situation may be changing.

Canada uses a Government Electronic Tendering Service through MERX for most contracts for goods and services valued at Can$25,000 or more, most construction and leasing services worth Can$100,000 or more, and most architectural and engineering consulting services worth Can$76,500 or more. MERX is a subsidiary of Mediagrif Interactive Technologies, which also provides information on U.S. tenders.[55]

PWGSC buys goods and services using contracts, standing offers, and supply arrangements. The Government of Canada has explained how these three methods are employed in the following terms:

Contracts

Contracts between PWGSC and its suppliers contain a pre-defined requirement or scope of work, and set terms and conditions including pre-determined quantities, prices or pricing basis, and delivery date. A contract is the best method of supply when the requirement is customized and unique to one government department.

Sometimes, for contracts for services only, when the Government is unable to define the precise nature and timing of a service in advance, PWGSC includes a provision for “task authorizations.” A task authorization is a structured administrative process to authorize work by a supplier on an “as and when requested” basis in accordance with the terms and conditions of an existing contract. In other words, when the services are eventually required, the Government issues a task authorization to the supplier. This task authorization identifies the scope of the services, the timing, and any specific instructions (such as expenditure reporting based on pre-established financial limits). Examples of services where task authorization contracts might be considered appropriate are professional services for translation, informatics professional services, and some types of repair and overhaul services.

Standing Offers

Standing offers are the preferred method of supply when one or many government departments repeatedly order the same goods or services, which are readily available, or when the actual demand (i.e. quantity, delivery date) is not known in advance. Standing offers are put in place, for a specific period of time with pre-qualified suppliers who have met the technical criteria, and include set terms and conditions, which cannot be further negotiated.

Standing offers save the Government time and money, as a separate process does not need to be conducted for each purchase and prices are often reduced due to volume discounts. The Government is not obliged to purchase any goods or services until a need arises, at which time a contract is put in place. Items bought through this method of supply include food, fuel, pharmaceutical supplies, spare parts, paper supplies, office equipment, and some professional services.

Supply Arrangements

Supply arrangements, like standing offers, are put in place for goods or services that are purchased on a regular basis from pre-qualified suppliers but the Government is not obliged to purchase any goods or services until a need arises, at which time a contract is put in place.

However, although supply arrangements include some set terms and conditions that will apply to any subsequent contracts, not all are predetermined. For example, prices, pricing basis or terms and conditions for hazardous waste disposal or cleanup may be further negotiated based on the actual requirement or scope of work. PWGSC routinely purchases IM/IT professional services using this method of supply.[56]

PWGSC has published a guide for doing business with the Government of Canada. This guide utilizes a five-step approach for small and medium businesses.[57]

V. Concluding Remarks

Canada has implemented the government procurement provisions of NAFTA and the AGP. The former does not cover subcentral entities and Canada has not yet added any provinces to Annex II of the latter so as to bind the provinces to it on a reciprocal basis. However, Canada and the United States have reportedly reached a deal that could change this situation. On the federal level, Canada has followed the legal requirements respecting federal government procurement, and the exceptions and exemptions its laws allow for are those contained in Canada’s two major international trade agreements. Canada does not have a “Buy Canada” Act. Federal government procurement is generally handled by PWGSC. Exceptions exist for departmental purchases of goods valued at less than Can$5000 and purchases of services.

The major issue in government procurement in Canada today arises out of the inclusion of “Buy American” provisions contained in the ARRA. Because provincial and municipal procurement is not covered by NAFTA and Canada did not add any provinces to Annex II of the AGP, it was not initially given a waiver from the “Buy American” provisions of the ARRA. The Government of Canada has been seeking a waiver for the past eight months, and the National Post and Calgary Herald are two of a number of news organizations that have recently reported that the government’s efforts may soon be successful.

[30] American Recovery and Reinvestment Act (ARRA), Pub. L. No. 111-5, 123 Stat. 115 (2009). However, section 301 of this law creates exceptions that allow for waivers in the cases of shortages of supplies, cost differentials of more than 25%, and the interests of the public.